The long history of public debt

Does the history of chronic state debt created by war or expansion contain useful lessons for the current crisis?

On the financial level, the assembly proclaimed the equality of all in front of the tax and began to unify at the level of the kingdom the tax levy. To extinguish the debt, she confiscated the property of the clergy, which can be estimated at 3,000,000 livres, with the engagement of taking upon herself the charges which hitherto fell upon the Church: the worship, the assistance, and teaching. To make this sale of the so-called national goods in good conditions, she issued notes intended to pay them, the assignats. The impossible tax reform had been achieved and the debt was destined to die. Unfortunately, this beautiful scenario quickly collapsed.

The flight of the king, then the war, the disturbances and finally the disorganization of the tax administration were the reason for the financial recovery. The assignat depreciated rapidly, expenditure rose exponentially, and not only was the level of contributions intended to replace the impositions of the Old Regime fixed too low, but the French paid almost nothing for nearly ten years, or then in depreciated currency.

The revolutionary government, cornered, turned assignats into paper money and emitted massive (nearly 50 billion in total) to meet its expenses. He thus contributed to the debasement of paper money, before suppressing it in 1797, when its value fell to almost zero.

In 1797, the Directory had to resolve a so-called two-thirds bankruptcy

By simplifying, he was getting rid of a pen of most of the debt by guaranteeing the payment of a fixed payment “Ruby on the nail” for the remaining third. In reality, accompanying measures were taken which made it possible to unburden the finances of the State: creation of new taxes, firm reorganization of the administration of the finances, put in confidence of the bankers depositories of the debt which offered to the Consulate and to the the Empire a healthy budget, supported by the temporary cessation of hostilities.

Looking back on this long history, we can draw some simple lessons. The public debt comes straight out of the extravagant expenditure induced by the great conflicts, and this rule is true as well with the first as with the second world war, but it is reinforced whenever an economic crisis amputates the resources of the ‘State. This was the case at the end of the reign of Louis XIV as during the Revolution when the economic recession combined its effects with the war.

However, the government’s debt has become chronic because its spending has increased and it is politically difficult to tax citizens at the level required for funding. Two positions have become important: support for the economic activity, especially in the event of a recession, at least since 1929; social spending induced by the welfare state, at least since Bismarck in Germany. A third has just appeared unexpectedly: the rescue of banks jeopardized by the absence of any regulation.

Except in case of war, and again, the public debt became unbearable only after previous wanderings of the financial and budgetary policy. If the monarchy succumbed, it was because it was not able to suppress the privileged tax benefits. The waste of public funds, the absence of a well-functioning tax system, the inability to hunt for fraud, the lax policies of favoring certain social categories or lobbies are the pathways to excessive indebtedness.
From a certain level of debt, it became uncontrollable since its service forbade repayment. To overcome their deficit, states have used several remedies but it must be admitted that these have rarely been simple and never painless. Three tortuous paths have been offered and are still available to politicians: do not repay the debt or phagocyte, save money, find additional resources for a loan.

– Execution of creditors or extortion is a priori excluded, bankruptcy or inflation, following the example of Law or assignat. They allow to loot violently or gently the creditors. Inflation was still very effective after the two world wars but we can see the undesirable effects.

– A policy of savings and reduce the debt via payday loan consolidation. But just as the non-financing of war inevitably led to defeat, so public spending cuts easily lead to social unrest and economic contraction, which in turn can reduce tax revenues.

– The taxation of occupied countries is no longer acceptable, the aid of other countries or international institutions, in the form of loans or remission of debts.

– The devaluation or, more precisely, nowadays, the depreciation of the currency. She hopes that the revival of exports will boost the economy and bring in money, but its political consequences can be harmful.

– The sale of offices being obsolete, the tax levy, with the everlasting dilemma experienced so well by the Ancien Régime: to increase the burden, which is economically and politically ill-advised; broaden the base by eliminating the underground economy and switching to high taxation of high incomes. Beyond this, there is a focus on harmonizing tax (and social) systems and regularizing capital flows. From this dreamed historical model, we are still far away.